Green construction shows rapid rise

While much of the new home market has been in retreat in recent years, there is one aspect which has grown significantly. According to a new report from McGraw Hill, green construction nearly tripled between 2005 and 2011.

The “SmartMarket Report: New and Remodeled Green Homes: Transforming the Residential Market” shows that green construction expanded from $6 billion in 2005 to $17 billion in 2011. This is not only a dramatic increase in terms of dollars, but it’s particularly significant in terms of overall market penetration. In 2006, green construction represented just 2 percent of new residential building. By 2011, green construction accounted for 17 percent of the market.

Green construction

The shift to green construction is a positive note for several reasons:

There is a need to preserve construction jobs. If building green homes means more jobs, that’s good for the industry and good for the economy in general.

Green construction means less energy usage and that benefits all power users. The need for new power plants is not based on typical daily use. Instead, the system is designed so that everyone will have power even at the moment of greatest usage, typically sometime in the summer when every air-conditioner is turned up. The construction of more green homes is really a way to reduce the need for more power plants and their use of coal, natural gas and nuclear fuel.

Who else in housing is going green?

For its part, the FHA has long had a mortgage program to encourage more green housing. The FHA’s energy-efficient mortgage–or EEM–allows borrowers to increase their ability to get an FHA loan by enlarging qualification ratios.

With the typical FHA mortgage, a borrower is allowed to have housing costs which are equal to 31 percent of their monthly income. With an energy-efficient mortgage, the FHA allows 33 percent of an individual’s income to be used for housing costs (such as mortgage interest, mortgage principal, property taxes and property insurance).

Also, the FHA allows a larger overall debt for borrowers. Usually as much as 43 percent of an individual’s monthly income can be devoted to housing costs plus recurring monthly expenses such as credit card debt, car loans and student debt. However, with an energy-efficient mortgage, the FHA permits borrowers to have as much is a 45 percent monthly debt load.

With an EEM, the FHA allows higher qualifying ratios because it assumes that the borrower will have lower monthly bills for gas, electric and other utilities. Lower monthly costs–whether in the form of mortgage rates or smaller utility bills–should all be welcomed.

An EEM can also be used to refinance a property provided it’s not a co-op loan or reverse mortgage.

The increase in green construction is something which should be applauded. Indeed, one wonders why all new construction is not green. Energy-efficient homes are good for all because they represent less drag on the power plant system. And given the way energy costs are rising, green construction should help with marketing when it comes time to resell the home.

There is also the fact that solar power adds 3.6% to the home value / appraisal on average.

For example on a refinance, if a home appraisal is close to where it needs to be, but not quite there, homeowners have a some options to improve home value quickly. They can get a solar lease (solar panels added to the home) in states like California and New Jersey for no upfront costs and free installation. This has been studied and shown to improve the value of the home by 3.6%. (ucla, national bureau of economic research). An example of this is http://www.qualifywithsolar.com.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog,
which concentrates on the latest developments in the mortgage and housing
markets.